Financial Literacy in India

The Essence of Money

We all acknowledge the fact that money is essential for sheer existence and survival yet tend to escape from learning  how  to  manage  money. Managing money means the ability to judiciously save and multiply the money earned, through an informed understanding of the financial pro-ducts and services available. It is also the question of avoiding risks and being protected from falling prey       to unscrupulous elements. In my opinion the single most critical factor in effective money management is to stay away from greed. Greed for making quick money often restricts the power to think and take appro-priate decisions. Greed and lust for easy money overpowers application of mind and the capacity to think sanely. We ignore the fact that money invested legally and ethically can hardly ever give returns which are disproportionate with respect to pre-vailing market conditions. Yet regu-larly we hear of people losing their hard earned money by succumbing to fraudulent schemes which promise attractive returns or trusting someone  who tempts them with windfall gains.

We must always remember that money does not grow on trees and investments/savings can fetch only normal returns which are in con-formity  with  market  norms.  Our indulgence in fancy schemes and faith in promoters whose credentials are not verified arises due to lack of adequate knowledge and the ability to think rationally. Money lost is difficult to retrieve; though checks and balances are there it is only the well informed who can pursue his case by approaching the respective authorities for redressal. We need to respect money for its value and its significance   for   sheer   survival. Financial literacy is therefore crucial for the well being of an individual from any section of society.

What is Financial Literacy ?

It is not logical to assume that all educated individuals are financially literate and the less educated are weak. In fact the converse could be true. What then is financial literacy? Simply expressed it is the ability       to  manage  one’s  personal  finance judiciously by making best/optimum use of one’s resources. There are different financial products and ser-vices available which cater to differ-ent needs and requirements. Under-standing these products and services and choosing according to the wants is what constitutes the right approach. These wants differ from individual to individual and even during the life span of a person the wants keep changing.  The  requirements  are linked to the risk taking capacity as the element of safety is crucial in an individual’s life.

Be it savings through bank/post office schemes, investing in stock markets or mutual funds, buying life cover and general insurance, raising loans or use of credit cards it is essen-tial to know the products thoroughly to make a well thought out decision. A prudent man generally relies on   his personal judgement rather than  dubious relationship managers/un-solicited help as trust and integrity    in financial matters are an absolute necessity. It is better to stay away from complex products and services if the knowledge levels are low as safeguarding of money is more impor-tant than taking unwanted risks. With the spread of technology and opening of the economy it has become even more important to select the appro-priate product after due diligence. Though technology has made ser-vices swifter and efficient it has     also  introduced  many  hazards.  A thorough understanding of the safe-guards in the technology process is all the more essential to avoid being a victim of fraudulent transactions.

To appreciate the significance and relevance of financial literacy for sound money management it may be worthwhile to capture a few illustra-tions.

(1) Taking the simple example of payment of interest on savings bank accounts not many still know that interest is now paid on the daily balance in the account. Rather than withdrawing money which may not be immediately required for a week at least it would be profitable if the same amount remains with the bank as it would continue to earn interest for the account holder. Better still the surplus funds in a savings account could be transferred to a fixed deposit account which would give higher interest.

(2) Those  seeking  loans  from banks often do not read the terms and conditions of the bank and blindly sign the documents thereby agreeing to the terms of the document. At times these papers are signed in blank  without  even  bothering  to understand the significance of the loan contract. Loan means having to fulfil many obligations by the bor-rower till it is cleared and pleading ignorance later does not help. In case of default the assets can be seized by the lender and the borrower has no scope to protect the asset without clearing the dues.

(3) Most loan documents require one or more guarantors to sign along with the borrower. This strengthens the  lender  in  case  the  borrower defaults. How many really know that the guarantor is liable to pay if the borrower does not repay the dues. There are many instances where the guarantors  regretted  signing  the documents and protested when they were asked to clear the loan. Such protests citing ignorance or lack of knowledge are of no use later.

(4) Most credit card holders do not realize that interest on roll over dues are charged abnormally high interest rates and interest gets com-pounded every month if the balance remains unpaid. Moreover service tax is also levied on the interest amount. Higher the interest amount higher the service tax becomes payable.

(5) Non-banking finance com-panies and corporates invite deposits from the public with offer of higher interest rates than most banks. It is quite logical for certain persons to be tempted to invest their funds in these schemes for the additional interest amount. What is of prime importance is to study thoroughly the back-ground and strength of the company before investing as the repayment of the deposit on maturity is not guaran-teed. There are so many examples where the companies have not retur-ned the money on maturity for various reasons. Some have even disappeared from the market after mobilizing substantial money. Ima-gine the poor person of meager means having to suffer the loss of money as he deposited in good faith but without full knowledge.

(6) RBI regularly releases reports of forged or counterfeit currency notes in circulation and the need to be cautious. How many of us really bother to understand the security features of currency notes to identify forged notes and take preventive action. The desired know how can stop the fraudulent use of illegal money and prevent undesirable con-sequences.  RBI’s  campaign  ‘Paisa Bolta Hai’ is an excellent audiovisual presentation on the measures to check the authenticity of a currency note.

(7) For the sake of credit and debit card holders there are regular warnings to avoid sharing their PIN and card numbers with any third person. Despite the constant educa-tion it is often seen that card users are asking total strangers at ATM centres and elsewhere how to operate their cards. The fact that they are inviting trouble is overlooked for the sake of momentary help. Little do we realize that knowledge can prevent many untoward happenings ?

(8) Insurance policies are pur-chased as tax savings schemes rather than the main objective of insuring life. The type of policy is also not properly understood as to the type of risk cover it is providing. Unfor-tunately the insurance agent is at times not fully educated himself or avoids suggesting the right policy for making higher commission payouts.

(9) Insurance policies carry a 15 days or in some cases one month free look period during which time the buyer can reconsider his decision to purchase the life cover. This enables the buyer to study carefully the features of the policy and compare it with his actual need. Very few really know about this facility which again demonstrates the need to be aware and vigilant.

(10) Retail investors enter the stock market hoping to make quick gains. Very few make their own independent studies but merely rely on hearsay. The results are obvious as a few lucky ones may make some money without adequate knowledge but the large majority suffer loses. There is also the ‘ASBA’ facility for subscribing to new issues without blocking one’s funds but very few take advantage of it. SEBI has tried to popularize this facility in many ways through  advertisement  campaigns and it is for the investor to gain from it. Once again the informed person only benefits.

(11) Investing in mutual funds has also become fashionable because of the coverage the sector gets. Yet it is a matter of debate as to how many can differentiate between equity or debt funds or even hybrid varieties. The investment is not linked to the risk taking capacity of the investor and his financial priorities. Often the investor is not aware whether his holdings in the fund belong to the growth or dividend option.

The above examples relate to very basic transactions but convey the significance of possessing sound knowledge  for  prudent  decision making. Absence of financial literacy can truly damage substantially the interests of the persons concerned. It is difficult to escape for any age group as money is needed by all.

The   Spread   of   Financial Literacy

It is better to start early with the process of financial education as discipline in money matters is an important characteristic of an indivi-dual. Children should be taught the benefits of saving and introducing the age old concepts of having a piggy bank can be a welcome start. Schools need to inculcate these habits in students  and  gradually  introduce them to the basics of personal finance. A beginning has already been made by introducing subjects on basic finance in the school curriculum at certain centres. Reserve Bank of India is promoting this early education of children by adopting a friendly and entertaining way through the medium of comics. They are also encouraging the young to participate in contests, the winners of which are awarded scholarships.  It  is  the  vulnerable sections of society like women, senior citizens, the rural and urban poor who need to be adequately educated and equipped. The Financial Literacy programme of RBI is tackling all these issues through different means. Their website is a store house of knowledge provided there is an urge to learn. The individual has to be proactive and be eager to grasp the necessary knowledge to safeguard himself and thereby his money. RBI is making extra efforts to be as trans-parent as possible in the larger interest of the common citizen by reaching out to them through their out reach programmes. These pro-grammes which were held during the 75th year of RBI in 2010 in far corners of the country were primarily to educate the masses about the activi-ties of RBI and how to utilize the available banking services for their betterment.

Most banks also have their finan-cial literacy departments and credit counseling centres where personal problems are addressed. How much of these centres are successes is deba-table because a very small percentage of people know about these facilities and even if they know there is an inherent hesitation to seek their help. The websites of banks and financial institutions also have all the details about their products and services. In case of doubts it is advisable to refer to these portals to avoid making any wrong or improper decision. The concern is that incomplete or half baked knowledge is not used to take decisions which are repented later.

BCSBI  or  Banking  Codes  and Standards Board of India has been set up by RBI as an apex body to improve the working of banks and introduce systemic changes wherever necessary for better treatment of customers. While their primary focus remains on customer service they are also par-ticipating in disseminating informa-tion on different aspects of banking. For an effective literacy campaign it is important that information asym-metry between service provider and customer is reduced. In this connec-tion banks have unilaterally under-taken to comply with a Code of Commitment to Customers detailing the nature of services provided by banks, the normal time taken for rendering  these  services  and  the various obligations of banks who have signed these codes. Only when there is awareness can the customers use the code to their benefit. It is for the individual to take advantage of the provisions provided there is will-ingness to learn. BCSBI also publishes a quarterly newsletter which is both informative and educative.

The importance of promoting financial literacy and the enormity of the task is being gradually under-stood. This has made many organi-zations enter this field to make their presence felt. Innovative ways have been adopted to keep the literacy efforts simple and user friendly for maximum benefit. Websites, print media and audio visual communi-cations relating to financial education are easily accessible for the average individual to improve his under-standing of the financial market, its products and services.

National dailies, banks, financial institutions, private organisations are individually contributing through easy to understand pamphlets, comic strips, newsletters etc. to reach the consumer  covering   fundamental issues. Seminars, conferences, inter-active sessions are often arranged to address issues of common concern and dissemination of information.

Spreading of information and awareness is critical for an emerging economy like India. If the vast popu-lation of deprived people is brought into the mainstream it would be of immense benefit both as a social necessity as well as an economic push. The call for financial inclusion in the country has therefore become an immediate priority and is engag-ing the attention of policy makers for effective execution. It would reap dividends only when the targeted people are financial literate. Only then would they be able to make the most appropriate choice of the pro-ducts and services which would improve their position. The vast majority of our people are extremely vulnerable as they depend upon informal sources of finance for meet-ing their needs. Only by empowering them with the adequate knowledge can we hope to improve their lot and that of the economy as a whole. The penetration of banking and insurance services is extremely poor in India and if the coverage is extended by simultaneous spreading of financial literacy it would be a huge progress for  overall  growth.  The  formal channels of money transmission has to be introduced for all round benefit as for far too long the poor, gullible people have suffered at the hands of the money lender and his brethren.

The  international  body  Orga-nisation for Economic Development OECD is putting its weight behind RBI in promoting financial literacy in India. There is no running away from this hard fact for which the financial service  providers  are  also  being trained  to  encourage  the  dissemi-nation of information in as compre-hensive a way as possible. However it is the individual as the consumer who needs to grasp and absorb the knowledge for his betterment and safety.

Money creation through the legi-timate way is hard and painstaking but can be lost in no time if there is improper financial planning. Finan-cial awareness is a critical component in  the  process  of  protecting  and enlarging the corpus of funds that an individual may have.